1. Introduction
Baruch Lev has written a thoughtful response to my commentary on policy recommendations for
intangibles. I am glad that my paper has generated a response from Professor Lev, who is acknowl-
edged as perhaps the leading expert on this topic, because I think the way we make progress on
questions such as this is to engage in dialogue. Lev’s response does not change my views – I still
believe that the case in favour of intangibles re- form is underwhelming. Rather than reiterating
points I have previously made, let me respond to some of Professor Lev’s specific comments and
simply encourage the reader to read both pieces carefully and reach their own conclusions.
2. The role of market incentives
Lev points out that one of the themes in my com- mentary is a reliance on markets to solve financial
reporting problems. My response to this is that, to paraphrase an old song, ‘if believing in markets is
wrong, I don’t want to be right.’ I am not repen- tant; I do believe that markets work well most of
the time. In my article I provide a number of ex- amples of how markets seem to work well in allo-
cating resources to intangibles-rich technology companies, in spite of what Lev would charac-
terise as overly conservative accounting. The tech- nology sector has boomed over the last couple of
decades, in spite of apparently being hamstrung by the traditional financial reporting model. Lev does
not respond in detail to these arguments but rather asks why we don’t allow markets to solve all of
our financial reporting problems. To some degree I agree with what seems to be an extreme position.
After all, as Watts and Zimmerman 1983 pointed out some time ago, there is evidence that audited
financial statements, in a form similar to what exist today, have been used for hundreds of years, and
so easily predate any form of securities regulation. My argument is also more complex than Lev’s
discussion implies. From an economic perspec- tive, I do think there is a role for regulators such as
the FASB and the SEC. I agree with the position in the Garten 2001 report that regulators can help
improve financial reporting for intangibles in at least two ways. First, no single entity has incen-
tives to develop an overall disclosure framework for intangibles. Yet it seems that developing such a
framework would be useful in standardising and encouraging disclosure. Second, if we do agree
that firms should disclose more information about intangibles if we can somehow ascertain that the
market is supplying too small a quantity of intan- gibles disclosures perhaps we should lower the
costs of these disclosures. For example, if these disclosures subject firms to legal risks, perhaps
some type of safe harbour can be utilised to en- courage more disclosure, similar to what is already
done by the SEC in the area of forward-looking statements.
3. Previous research on intangibles
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